Widow of opportunity

Implementing auto-enrolment, nurturing defined ambition and solving the long-term care conundrum are all priorities for Scottish Widows chief executive Toby Strauss. John Greenwood asks him what needs to be done.

Toby Strauss is clearly finding fulfilment at the helm of one of the nation’s most established pension companies at a time when we are grappling with a historic transition to a more self-funded style of retirement.

Despite a pedigree in smaller organisations such as Charcol and JS&P, Strauss is enjoying the opportunity to do work of more far-reaching significance within the big beast that is Lloyds Banking Group.

“I see myself as a guardian of a company that has been around for almost 200 years and my job is to guard it safely and try to deal with the problems of the day. When Scottish Wid- ows was founded, the problem of the day was Napoleonic widows. Today the problem is that we are all living a hell of a long time and the state can’t provide. I think the business has a key role in helping people to understand that and save,” he says, couching his words with enough self-deprecation to avoid pomposity.

“Clearly there are policies in a group context that mean, in an entrepreneurial, private equity-backed business, you can define your- self. The flip-side of that is you have so much more impact in an organisation of this scale.

“So if you are trying to fill the long-term savings gap, in an entrepreneurial business you ain’t going to get very far in a UK context. In this context I am able to do something about it.”

For Strauss that means making sure Widows is doing all it can to make the transition to private provision as easy as possible, and that involves getting policymakers to adopt structures that allow providers to make an honest profit in areas where doing so benefits the public, although when it comes to consultancy charging. It also means making sure auto-enrolment goes smoothly, despite the industry having lost the battle over consultancy charging.

So what does Strauss make of the recent Towers Watson report that predicted providers would be operating at seven times capacity by year end? 

“In our case, it’s not as bad as seven times capacity. But we have been putting in place plans to address that huge bump in need. Our general insurance business has natural peaks and troughs and some of those peaks can be addressed by these resources. For us, it is two to three times capacity by the end of the year, and then staying at that level for a couple of years. It is difficult to plan, though, because we haven’t got through any mid-size employers. How many will go straight through and how many will need hand-holding is not yet clear.

“Our view is that most of our business will be existing book business because of advisers finishing off the pipeline for last year – and partly because as we approach auto-enrol- ment staging dates, advisers won’t be out there looking for new schemes. An employer will not want to change schemes and auto- enrol at the same time. There will be some schemes where the provider hasn’t invested in auto-enrolment. In the schemes that are going to stage in the next 18 months, there will be fewer of those.

“As time goes on there will be more situations where the provider is not doing auto-enrolment, and that will be a nightmare. But that is some way down the road.”

Widows has also declared its intention to be a more active player in the annuity market, but it is the thorny issue of funding for long-term care, and how the industry should respond to the Dilnot Report, that is the more complex challenge for Strauss, who stresses just how committed the government is to find- ing a workable solution to the issue.

“I don’t think people will choose to insure the £75,000,” he says. “If the claims record is one in four, I don’t think human beings will pay the premium required to insure that. They will self-insure. But the government is extremely keen, particularly health secretary Jeremy Hunt, to see Dilnot have real legs. So I do believe they are very receptive to inno- vation. At one end of the spectrum it is com- pelling people to use some of their tax-free cash to pay for their long-term care. Although whether that would be politically acceptable is a completely different kettle of fish.

“The other piece of the puzzle is equity release. But the challenge here is that, with very good reason, there is a lot of governance over the sales process. If you are talking about the middle market releasing £30,000 to pay for care, spending £5,000 of that on the advice process is not going to go down too well. So could you streamline that if the only way you were spending the money was on a long-term care product, rather than on a holiday?”

These ideas are being worked on by a number of working groups due to report to the government in the next few months.

Strauss is also looking at ways to make defined ambition a reality.

“The marketing message of being told you would get three times your money back – you contribute a £1, the employer contributes, and you get the tax relief and a bit more – would

give people a lot of confidence. The challenge is implementing it.

“We have done some work on the cost of the guarantees and you can get them to be affordable, particularly if you do them at a younger age. But it’s all very well working out the notional cost of the guarantees – the question now is who is going to provide them. If you have to build it into the product, it is going to be a lot of work. If you can create it in the fund layer, it is going to be a lot easier because you add a fund for each year and it is easier to include in our pension product.”

Five years from now, could a defined ambition option be the default fund for certain groups of employees?

“Maybe not the default fund but it would be a very attractive option, either for people to pick up or know they can pick up. If you do your stochastic modelling you can find that the guarantee is only likely to be needed perhaps 8 per cent of the time. So it needs a little bit of safe harbour around it that says the people who offered that don’t get sued for the fact that it would only have been useful 8 per cent of the time.

“In that sense, people who will say it’s a waste of money are right. But that ignores the behavioural finance angle. So I am a huge advocate of it if it can be made to work.”